Tuesday, August 2, 2011

Monetary scholar Edwin Vieira ... pointed out that every 30 to 40 years the reigning monetary system fails and has to be retooled. The last time around for the U.S. was in 1971, when Nixon cancelled the convertibility of dollars into gold. Remarkably, the world bought into the unbacked dollar as its reserve currency, but only because that was the path of least resistance. But here we are 40 years later, and it is clear to anyone paying attention that the monetary system is irretrievably broken and will fail.

What will replace it is still unclear, but I suspect that when the stuff really hits the fan and inflation rages the government will try the approach taken by the Germans to end their hyperinflation back in the 1920s, coming up with the equivalent of the Rentenmark – a dollar that is loosely linked to some basket of commodities and financial instruments. It won’t be convertible, because it would be impossible for bank tellers to exchange your dollar for a cup of oil, and a coupon off of a bond, and a chip of gold, or whatever makes up the basket – but it might restore some semblance of confidence in the currency. That’s one option. Another is that some government decides to make its currency convertible into precious metals; but that will only happen when all other less fiscally restraining systems have been floated and failed. Simply, at this point we can’t know what will replace the current monetary system, or when. All we can know is that the status quo cannot and so will not survive this crisis.

Regardless, between now and the point in time where the Fed throws in the towel on today’s fiat monetary system, you would have to be naïve in the extreme not to expect volatility, uncertainty, and wholesale financial dislocations.

According to a study of 775 fiat currencies by DollarDaze.org, there is no historical precedence for a fiat currency that has succeeded in holding its value. Twenty percent failed through hyperinflation, 21% were destroyed by war, 12% destroyed by independence, 24% were monetarily reformed, and 23% are still in circulation approaching one of the other outcomes.

The average life expectancy for a fiat currency is 27 years, with the shortest life span being one month. Founded in 1694, the British pound Sterling is the oldest fiat currency in existence. At a ripe old age of 317 years it must be considered a highly successful fiat currency. However, success is relative. The British pound was defined as 12 ounces of silver, so it's worth less than 1/200 or 0.5% of its original value. In other words, the most successful long standing currency in existence has lost 99.5% of its value.

Given the undeniable track record of currencies, it is clear that on a long enough timeline the survival rate of all fiat currencies drops to zero.

History has a message for us: No fiat currency has lasted forever. Eventually, they all fail.

BMG BullionBars recently published a poster featuring pictures of numerous currencies that have gone bust. Some got there quickly, while others took a century or more. Regardless of how long it took, though, the seductive temptations allowed under a fiat monetary system eventually caught up with these governments, and their currencies went poof!

You might suspect this happened only to third world countries. You’d be wrong. There was no discrimination as to the size or perceived stability of a nation’s economy; if the leaders abused their currency, the country paid the price.

As you scroll through the currencies below, you’ll see some long-ago casualties. What’s shocking, though, is how many have occurred in our lifetime. You might count how many currencies have failed since you’ve been born.

11 comments:

Not surprising, considering that most economists like inflation as a way of redistributing wealth and only a small number of countries have a deflating currency compared to the number of countries with inflation. Amazing how a country's government can survive for years by simply printing more money when everyone taking advantage of the system is too afraid to criticize it. The reason that the majority of the public was opposed to raising the debt ceiling, and the majority is also opposed to government spending to create jobs, is partly from a desire to avoid inflation.

Should also mention the reason the government is forced to resort to fiscal spending in the first place.

The large decline in the value of the British pound over the last 300 years is not any sort of failure. It is generally accepted that a 2% rate of inflation is about optimum. Given that assumption, ALL currencies will decline to a small proportion of their current value over the next century.

Of course inflation is a tax, but what of it? Governments have to collect taxes, and taxing people who can’t think of anything to do with money other than sit on large piles of it is not a bad form of tax.

If I recall correctly, runaway inflation was the reason the federal reserve note was issued in the first place.

There are other options in converting out of a failing fiat currency. Rather than tying into metals, one can tie into other precious resources such as energy, minerals, or military power. Today's American currency is arguably tied to military power (though we should rue the day that this value is tested).

If my understanding is correct, Brazil escaped the failing reais by converting to another fiat currency, the real. Instead of tying the two together (which would have destroyed the real), they tied the real to the stability of government (military power). By acting early enough, they prevented the collapse of the state.

When one source of authority is corrupted and becomes plainly undependable, another authority can be created as long as the people will buy into it. It is a sad reflection on humanity, but the sadder reflection would be massive shortage and warfare because of irresponsible leadership.

The US dollar is tied to US military global domination, as another commenter pointed out in a drive-by manner. A fiat currency doesn't HAVE to have that backing. It can be strong as long as the economy is reasonably fair. If our society was not turning into a feudal society, the fiat dollar could actually still be solid, even without the backing of US global military power.

"Currency introduced in Germany at the end of 1923 by the president of the Reichsbank, Hjalmar Schacht (1877–1970), to replace old Reichsmarks which had been rendered worthless by inflation.

As Germany had no appreciable gold reserves, the currency was guaranteed against the assets of the country, namely land and railways. Schacht's success in stabilizing the currency was largely due to the population's willingness to trust the new Rentenmark.

In November 1923, the government issued the so-called Rentenmark. The previous currency could be exchanged at a rate of 1 trillion marks for 1 Rentenmark. Inflation quickly stopped. People spoke of the "miracle of the Rentenmark." But the truth is that it wiped out the savings and investments of large swaths of the German middle class as well as wealthy people who had been forced to finance the war by buying government bonds that had now been rendered worthless."

Here are some graphs of the Weimar Republic runup leading to the rentenmark.

http://www.nowandfutures.com/weimar.html

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This is an example of an asset backed currency from history and this is what is happening here, now.

The S&P can go to 100,000. The German stock market rose from 21,400 in January to 26,890,000 in November at the peak in 1922.

What's striking is that the rentenmark was backed by and redeemable in land and business bonds.

Sound familiar?

(MBS, CMBS)

The Fed is loading up on land and business bonds.

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Would combining an asset backed dollar with negative nominal interest rates create a currency that limits economic growth like a gold backed currency?

Gold is an asset. Gold backed currencies are asset backed currencies. They would behave similarly, except for one major difference:

Paper assets are easily created.

Backing a currency with paper assets would create an inflatable currency. NIRP would cause assets to be used to increase assets, not dollars. Negative rates would make stocks more attractive than cash. Negative rates would increase total number of enterprises.

Would entropic money put a lid on economic growth after the initial explosion of dollar divestiture caused by the implementation of negative interest rate policy (NIRP)?

Negative interest rates would make the dollar only useful as a medium of exchange and no longer as a store of value.

Time is money. You spend time. Negative interest rates mean money with a shelf life. This is the time value. Disappearing money will have a very high velocity.

Combine nominal NIRP policy with an asset backed currency and all kinds of fun chain reactions happen. For one the money multiplier effect would go off the charts, deploying all the excess bank reserves into any marginally useful endeavor.

Only by forcing compliance with a cashless system will it be possible to shift money from being a store of value to a store of time. A transaction currency will be created with explicitly no value and only the threat of force keeping it as a medium of exchange.

People do not wish to believe what is staring them right in the face, screaming to be noticed because they are over invested in their media programming.

Protect your families and your savings. This is real. This is now. Make defensive moves into land, physical PM, and other tangible assets.

Debasement of the world's fiat currency must be significantly different than debasing a national currency. No other country can export the negative effect of their government debt like the USA can.

Also, pegging the dollar to a basket of commodities would cause a federal government debt payment crisis. The last time I looked the Fed routinely purchases over half of all government IOU's at least partly to keep interest rates within parameters so the federal government does not implode.

IOW, low interest rates are no longer Fed administered heroin in order to aid the economic patient through its recessionary sickness. The patient is now dependent on the heroin for survival. If the Fed could not print money willy nilly, the government would need to significantly cut spending. It is that simple.

And virtually no country in the western world has proved they can do that.

It will not be America that decides what it is based on . The of the Federal debt notes will end in 2012 and the next currency will be called the Petrol dollar.If you doubt any of this your simply ill informed

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